Small Business Loan Guarantees – How it Works
A Loan Guarantee Program based on the State Small Business Credit Initiative, allows small businesses, typically fewer than 500 employees, and usually a lot less than that, to get a Small Business Loan or Line of Credit.
These funds can be used for start-up costs, inventory, working capital and business procurement to name a few areas for use of funds.
Generally speaking, the bank and the borrower negotiate terms, although, in some cases these are subject to approval by the state. In other instances the state and lender discuss terms before approving the loan and issuing a guarantee. The state usually sets aside a dedicated reserve to guarantee a percentage of the approved loan.
Loan guarantees are issued on behalf of the state by 11 non-profit Small Business Financial Development Corps. These FDC’s review and approve applications. Normally about 75% of the loan amount is guaranteed, but is negotiated between the FDC and the lender. The maximum guaranteed term is seven years with the average being about three years.
The requirements for supporting the loan requests are as follows:
1. A written description of the existing or proposed business.
2. Resumes of each owner and key management personnel.
3. Current personal financial statements are required for all principal owners (20% or more) and guarantors, together with copies of the last three years Federal Income Tax Returns. Financial statements should not be older than 60 days.
4. Written statement indicating how the loan funds are to be repaid, including repayment source and time required. This written statement should be supported by cash flow schedules, budgets, and other appropriate information.
5. For a proposed business provide a pro forma balance sheet reflecting source and use of both equity and borrowed funds.
6. Financial data on business. For an existing business provide tax returns and financial statements for the past 3 years. A recent interim statement should also be provided.
A recent aging of accounts payable and accounts receivable should also be included as well as a schedule of term debt. Other balance sheet items of significant dollar amounts contained in the interim statement should be explained as to the nature of the item.
7. Projections of future operations should be provided for at least one year on a monthly basis reflecting revenues and expenses with additional projections provided on a cash flow basis. The assumptions used in preparing the projections should support the need for the funds requested and reflect the ability to repay the loan.
8. Additional items are requested. These items might include: leases, purchase agreements, contracts, purchase orders, partnership agreements, franchise agreements, etc.
Because this is a government guaranteed loan, the borrower must submit a number of auxiliary documents authenticating the need for the loan plus supporting material indicating a solid business plan and the ability to repay the loan.
Fortunately, for those seeking quick capital solutions with less paperwork, there are alternative funding sources that don’t require the plethora of financial statements and businesses planning which banks need to underwrite a loan. If you have questions about obtaining financing please call the Underwriting Specialists at Liberty Capital Group, Inc. at: